The Dangerous Hidden Clause in Your Business Loan

These are challenging times and small business owners are seeking financing in record numbers. The SBA (Small Business Administration) has been a significant help for many industries, but not all industries are covered (Here’s the SBA’s list of eligible and ineligible industries) and, as we learned this month, the PPP (Paycheck Protection Program) fund has run dry. Cash-strapped business owners looking for financing may end up turning to quick and easy cash advance loans — which are technically not a loan at all — but structured as a “purchase of future receivables.”  Due to this legal loophole, a Merchant Cash Advance is not subject to the regulations and rules of traditional lenders and some MCA (Merchant Cash Advance) lenders take it a step further by requiring business owners sign a Confession of Judgment before they can receive their cash advance “loan.” 


NOTE: National Credit Partners works closely with Alternative Lenders who offer MCAs. Our programs help their clients remain in good standing and able to qualify for future loans because their loans are paid back 100%. Consequently, because we are not a lender or debt settlement company, lenders consistently come to us for assistance with their clients who are in significant hardship. If you are a lender or broker, please click here for information about our partnership opportunities.

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The Quick Fix 

Of course, every borrower and business owner intends to pay back their loan as agreed, however, Merchant Cash Advance agreements are set up with weekly—or even daily—withdrawal payments directly from the business owner’s bank account. A few weeks of severe weather, a personal emergency, the loss of a key employee—any of these incidents could throw a wrench in the operation of your business and suddenly you’re struggling to keep up with your payroll and loan payments. Unfortunately, the natural response is to apply for ANOTHER Merchant Cash Advance loan and now, that wrench in your operation has become a chasm of debt that may be too deep to escape. At National Credit Partners, we work daily with U.S. small businesses, and many have found themselves so desperate for immediate cash, that they become “stacked” with multiple MCA contracts that become dangerously more expensive with each new “loan.”


The Hidden Danger 

Businesses in hardship are looking for any solution they can find, and a quick cash infusion seems to make a lot of sense, with alternative lending often the best course of action. Businesses who cannot get traditional loans have little choice and enter into agreements containing terms and conditions with which they are unfamiliar. Buried in some Merchant Cash Advance agreements is a hidden clause called a Confession of Judgment. Before borrowers are approved for the loan, they must sign a statement giving up their right to defend themselves if the lender takes them to court. It is like an arbitration agreement, except the borrower always loses. Armed with a confession (COJ), a lender can, without proof, accuse borrowers of not paying and legally freeze their bank accounts before they know what has happened.  


There is no court battle, no litigation, no back and forth with the other side because you, the business owner, already “confessed” that you are guilty and that you owe this money. If your business accepts credit cards and your MCA lender has the information on the merchant processing company, they also have the ability and legal right to intercept daily credit card payments from the processing company until your debt is paid in full. Once legal fees and penalties are tacked on…it’s “Game Over.” 


It Gets Personal 

It is no secret that most small business owners have a significant amount of personal equity tied to their company, yet they are often misinformed about the amount of protection their personal assets are provided from default judgments. Often, Personal Guarantee clauses are included in loan agreements and many business owners fall victim to forfeiture of personal assets as lenders pursue their funds.  


The Clear Solution 

When businesses are in financial hardship, it is important to note that increased cashflow is indeed a priority, yet that does not necessarily mean seeking additional financing is the best solution. Likewise, a debt settlement offer — designed to pay off a debt to a lender for an amount less than the full balance owed — may reduce debt payments, but the result is a dangerously compromised credit profile. Debt settlements may appear to be an immediate solution but destroyed credit will jeopardize any lending options in the future. The ideal solution is to negotiate with all lenders and restructure ALL loans to immediately reduce the monthly debt payments by 50-70% and preserve the relationship with the lender by ensuring 100% payback of their loan. The Small Business Debt Relief Program, administered by debt modification firm National Credit Partners keeps the best interest of the lenders in mind (100% payback) and offers increased cashflow of 50-70% to cash-strapped businesses while allowing them to maintain or even improve their credit worthiness.  


A Final Notes for Small Business Owners 

Be wary of Confessions of Judgment that may be packaged in other terms, such as an Agreed Judgment. Additionally, watch closely for any clauses, statements or stipulations that require similar admissions from you, the borrower.  


If your business is currently under hardship, it is important to know you have resources at your disposal. Please complete the form on this page and speak with one of the debt specialists about the Small Business Debt Relief Program. 

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